Main Points

Like other markets, the fertilizer sector had a historic high since the beginning of the year;
Result of delays in the supply chain, geopolitical issues and the scarcity of raw materials.
The consequence is directly seen in the production costs of the agro sector.

No Surprises

As we mentioned in the last cost of production report,we analyzed the cost inflation across the sugar and ethanol chain.
The high sugar and ethanol values are increasing the cane price in Centre South Brazil.
Additionally, because of the macro scenario, the high price of inputs and fuels (diesel in particular) affects even more costs of production.
In this report we will take a closer look into one of the inputs that rose the most in the past year: fertilizers.

We had a three-factor combination that caused the rally in fertilizers prices: exchange rate (weakness of Brazilian Real), higher maritime freights and the supply crisis of some raw materials.
Starting with the exchange:

Real weakened 3.5% against the Dollar when compared to 2020, trading at an annual average of 5.35 BRL/USD.
Since a great portion of the raw material for fertilizers is imported, the weak Real significantly affected the final price for producers.

On the logistical side, the maritime freight suffered a widespread high.
For example, the pandemic saw countries racing in securing raw materials, leading to a shortage of containers.
The container freight values climbed from 2k USD/TEU to more than 10k USD/TEU.

Another factor was the potassium supply crisis.
Different from what many imagine, it is not a problem of raw material shortages, but actually a geopolitical issue:
The US blocked imports from Belarus, which is responsible for 1/4 share of the world’s production of potassium chloride

And specifically, 30% percent of Brazil’s potassium imports are from Belarus.

This created a problem of sourcing the material, that ultimately affected price.

And last but not least, nitrogen.
This input was also affected by supply crisis.
One of the reasons for its shortage is the Chinese energy crisis – for more information on this topic read this analysis.

The price of natural gas (quoted in the English exchange), one of the major inputs for nitrogen production, has risen 5000% since May 2020

The MAP, mineral fertilizer that contains phosphorus and nitrogen, rose 93% – going from 415 USD/ton at the beginning of the year for the current price of 750USD/ton.

With prices at record levels, many producers are replacing and/or rationing some fertilizers.
They are applying less nitrogenous fertilizers such as compost and replacing it with filter cake – an important residue from the sugar and alcohol industry.
Still, neither farmers nor millers can manage to escape completely from the price hike.
Agricultural costs correspond to approximately 62% of the total cost of sugar production
But within the cost of the inputs used in the treatment of sugarcane, fertilizers have a weight of more than 50%.
With the rise in cane price and inputs, and Real devaluation, the average cost of sugar production in Centre South Brazil rose about 20% yoy, reaching around R$1500 /ton.

Talking to people close to the fertilizer sector, the feeling is that the scenario will not normalize in the short term.
Many bet that the supply shock should last for the first quarter of 2022 – raising a red flag for the second corn crop, the largest in the country.
Therefore, fertilizer prices are expected to remain high, resulting in operations costs to follow suit…
The focus for a while will continue to be cost control.
All that is left for us is to monitor how the cane fields will react in the 2022/23 crop, with this potential reduction in agricultural maintenance …